Stocks as Long-Term Investment Beating Inflation for First Time Since Late 1990s

Stocks as a long-term investment are beating inflation again for the first time since the late 1990s bull market, the latest sign of the scope of the 2013 market rally.

The Dow Jones Industrial Average’s gain Friday morning put the blue-chip index at a recent 16248.40–a new inflation-adjusted high, according to calculations by William Hausman, an economic historian at the College of William & Mary in Williamsburg, Va.

The Dow’s previous high as adjusted for subsequent increases in the consumer price index was reached Jan. 14, 2000, at 16186.39. Since then, the consumer-price index has risen more than 30% and until now, stocks lagged behind.

The Dow has set 46 closing records this year and was up 23.5% heading into Friday’s trading. But the gap between the Dow and the inflation-adjusted figure meant all the headline-grabbing records between 2000 and now didn’t mean quite so much.

An inflation-adjusted record means blue-chip Dow stocks have regained the real value lost in two deadening financial crises. In a way, investors finally can put behind them the Internet bubble, Sept. 11, 2001, terrorist attacks, accounting scandals such as Enron Corp., the housing bubble, collapse of Lehman Brothers Holdings Inc. and other costly stumbles.

It would mean that the “lost decade” during which stocks never surpassed their values of the 1990s finally is over, at least for the Dow. Of course, a new inflation-adjusted high also is a reminder that stocks have done no better than tread water since 2000.

There are qualifiers. If you add in the effect of dividends and taxes, the “total return” of the Dow is higher. With dividends included, the Dow probably hit a real record some months ago.

In addition, some economists don’t like using the consumer-price index, and people don’t actually buy all their assets at a top or a bottom. Still, inflation-adjusted records are a better measure of market value than unadjusted records.

The broad S&P 500 index remains far from an inflation-adjusted record, as does the Nasdaq Composite Index, which lost the majority of its value in 2000 and 2001.

One way to interpret all this is that blue-chip stocks represented by the Dow have nearly recovered from two bear markets, while the broader, more-volatile group represented by the S&P and the Nasdaq has farther to go.